An ongoing review of politics and culture

Matt Yglesias meet Daniel Bell. “Capitalism requires more of an ethic than ‘greed is good’” isn’t a new argument, on the left or on the right.

Here’s the thing, though: the statement “the social responsibility of business is to increase its profit” doesn’t really even make sense in its own terms, because “business” as such isn’t an active agent, and as such can’t have responsibilities of any kind.

Suppose I own a neighborhood bar. Does Milton Friedman think that I have an obligation to maximize the profits from the bar? But why? How does he know why I bought the bar in the first place, what function it serves for me? Maybe I bought it so I could hang out with musicians who I would invite to play there. Okay then – does it make sense to say that the bar itself has an obligation to maximize its profits? But what on earth does that even mean? I don’t have such an obligation. The staff of the bar all report to me, not to the “bar itself.” If I don’t have an obligation to maximize profits, then by definition the “bar itself” cannot.

You could say that the “social responsibility” of the “bar itself” was to serve drinks, inasmuch as if it didn’t fulfill that responsibility, then it wouldn’t be a bar. To generalize, the “social responsibility” of any business itself is to provide a product or service to a clientele. But who has a “social responsibility” to maximize profits?

If anybody does, it’s for-profit corporations, entities that behave as independently active agents in society, and which are structured in such a way that they are, indeed, formally obliged to produce profits for shareholders. But this isn’t part of some “essential nature” of for-profit corporations, because for-profit corporations aren’t natural entities; they are legal fictions. As such, to say “the social responsibility of a for-profit corporation is to increase its profit” is merely tautological – of course it is, because that’s what we set them up to do, but nothing whatever can be deduced from this about how things should be, or even whether such entities should exist. In theory, for-profit corporations could be structured so that they are obliged both to produce profits for shareholders and to account for the interests of other stakeholders – for example, giving workers’ councils a formal role in the management of the corporation would make the corporation accountable both to the interests of shareholders and those of employees. Would such a structure be better or worse than the legal regime we have now? I don’t know – but it would be equally natural (or unnatural), being equally a creation of the law.

In any event, I’m not sure that “ethics” are a solution to the specific problem Matt cites, because that problem has nothing to do with capitalism. Incumbent guild-members in the 13th century were no doubt very pleased with the guild system, and would have been quite put out by any suggestion that it be opened up to greater competition. I’m really not sure what Matt expects businessmen to do. Does he think individuals have a moral obligation not to take advantage of available tax loopholes if they don’t really “need” them?

It’s one thing to argue that people should feel shame from earning money in a socially destructive way – dumping toxins in the water, addicting people to nicotine, mainstreaming pornography; you pick your favorite “bad” business. But an ethics where people are going to turn down money for nothing? Seriously?

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I assumed the argument was that the CEO has a responsibility to the shareholders to maximize the returns on their investments. Which starts off with a pretty undeniable germ of truth: namely the CEO does have a moral duty to the shareholders. It is their money, after all. What doesn’t follow from this is that maximizing the returns on their investment is her only moral duty qua CEO. But that seems to be the argument people want to make when they mention this.

I think your claim, that keeping money through the use of tax loopholes causes no negative social disruption, is flawed. Taking advantage of loopholes to retain money that is not needed prevents that money from being used in a manner to advance the welfare of society as a whole. If people have a moral obligation to behave in a manner that is not socially destructive, as you imply, then where is the distinction between this and an action that benefits oneself at the expense of others? Where is the fundamental difference between depriving those who might need the money I’m keeping, which is essentially what I’m doing (leaving aside arguments about the government’s ability to effectively use that money) and any of the examples you cite (toxins, nicotine, etc) that I do have a obligation to avoid in order to promote the general welfare? Are they not all essentially methods whereby I advantage myself at the expense of others?

“The social responsibility of business is to maximize its profits” was originally a counterargument to the claim that businesses can improve society by pursuing some non-profit-maximizing activities. (For example, environmentally friendly practices or philanthropy.)

Friedman believed that the best thing a business can do for the rest of us is to focus on profit-making; that would result in better products and services, at lower cost, and more efficient allocation of resources generally. If businesses try to be philanthropic or green, they’re likely to make mistakes — they don’t know what would really be best for the environment or other causes, because there are difficult knowledge problems there. Also, they have strong incentives to focus on the appearance of social responsibility, rather than the substance. So, Friedman would argue, society would be better off if businesses didn’t try to be do-gooders, but just focused on business.

I think, by this reasoning, it is not in fact the social responsibility of businesses to engage in rent-seeking. The “good” that businesses do for society, in classical economics, is in providing desirable goods and services and pricing them efficiently. That’s the kind of social responsibility to maximize profits that Friedman was talking about. Maximizing profits by rent-seeking (or, even, by fraud!) doesn’t have any of those socially beneficial effects.

Ratz. The title of this post sounded interesting — more interesting than the usual fare on The American Scene. Unfortunately, it seems to have been bait-and-switch advertising for a bunch of sophomoric moralizing.

Anyone know a good blog with articles that are actually about the topic of “cultural contradictions of capitalism”? Or even about capitalism and culture, never mind the contradictions?

Friedman’s view is plausible in the more narrow way that was described by Sarah above. But to me (and perhaps Yglesias), the problem is that this view has taken on a more robust meaning. Where instead of greed being this inevitable thing that we try to make the best of… we as a society have genuinely started to believe profit motive always leads to good outcomes. Which is why we barely blink our eyes at things that make rent seeking so damn easy (Y halo thar Citizens United).

Friedman’s single line from that piece is memorable, but he didn’t intend it to be an aphorism that would carry the day out of its own intuitive power. That’s why he wrote an essay defending the proposition, and I think Noah is leaving his arguments mostly unaddressed. (Friedman does not, for instance, make a claim about the “essential nature” of a for-profit corporation, and he shows every indication of being aware that humans create institutions.)
Noah: “business” as such isn’t an active agent, and as such can’t have responsibilities of any kind.

Milton: The discussions of the “social responsibili­ties of business” are notable for their analytical looseness and lack of rigor. What does it mean to say that “business” has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities, even in this vague sense.

Milton’s critique of broad social responsibility starts from the same place as Noah’s critique of the narrow social responsibility to make money; and Noah ends up agreeing that under our system for-profit corporations have a non-social responsibility to make money. And it certainly isn’t as though Friedman is attached to the “social” adjective. If that isn’t clear from the above quotation, it is when he says “What does it mean to say that the corporate executive has a ‘social responsibility’ in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers.”
Moreover, Friedman’s arguments can be applied as answers to Noah’s suggestion that government could require corporations to account for social responsibilities. Friedman’s objection is, again, not that a socially responsible corporation is “unnatural,” but that it is a bad artifice, in that it taxes without representation and more generally performs governmental functions without desirable institutional restraints. We have a government in place to decide where market and civil society have failed to provide social goods, and how much cost to impose on society in order to achieve those goods through a process that we generally think is good for keeping factions and whims in check and decentralizing power where we think it needs to be decentralized. Your workers councils and whatnot suddenly reempower factions.
Friedman’s essay is here: http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html

As for the question of whether we can get people to turn down free money, I don’t think it’s impossible in all cases. We’re always hearing about the stigma attached to accepting non-corporate welfare, and how many eligible recipients are not on the dole. People probably turn down the opportunity to shoplift even in cases where it would be easy for them to do so, and my understanding is that lots of people don’t default on loans when it would be in their interest to do so.

One thing about the word “responsible” or “responsibility.” It’s not a standalone word. It’s a meaningless term unless you specify an object, i.e. responsible to whom. If you don’t specify the “whom” you’ll get into all sorts of meaningless arguments.

Sometimes in schools people use the word in place of words like “right” and “wrong” as a way of preaching morality while trying to pretend that they are not trying to impose their morality on anyone else. But it doesn’t work.

“Anyone know a good blog with articles that are actually about the topic of “cultural contradictions of capitalism”? Or even about capitalism and culture, never mind the contradictions?”

Click on my name and you’ll find an excellent blog called “What’s Wrong with the World” that deals with a lot of topics, one of which is capitalism and culture. Check out Paul Cella’s series of posts on the “Great Usury Crisis” for some interesting reads.

As for the question of turning down free money, that pitcher who was guaranteed a bunch of money in his contract and then walked away because he felt like he wasn’t earning the money shows that some folks still do still have ethics and a moral character.

Just in case folks don’t want to go over to Yglesias’ place or don’t want to read more than that one post, the dude has been obsessed with the concept of “rent seeking” recently. It’s a perfectly valid subject for discussion, of course, by MattY approaches it as a neoliberal with virtually no experience in any sort of for-profit or economically competitive environment. As such, he now sees “rent seeking” hiding behind every corner and under his bed.

Bryan, Console: right. The CEO has a professional duty to his shareholders. They employ him. By the same token, that duty cannot be his only duty in the world. He has his own personal interests – otherwise he couldn’t justify taking a salary for the work he does (a salary that comes out of the shareholders’ pockets), nor taking weekends and holidays off to be with his family, etc. Presumably he also has civic responsibilities, as well as some notion of personal honor (one hopes). I don’t see, though, why a CEO would necessarily think that lobbying for a favorable regulation is a dereliction of his civic duties or a violation of his personal honor. If the CEOknew that he was harming the general interest by doing so, one could say his action was dishonorable. But in real life, these questions are rarely so clear-cut, and besides, if he knows it’s in his interest and his company’s interest to get this regulation, it will be much harder to convince him that said regulation is against the general interest. That’s just basic human psychology.

I think that answers jonathan as well – I don’t think anyone can go through life as a thorough-going Kantian, and if my post suggested that I did think so, I apologize for the confusion.

I also think it answers sarah. “Businesses should focus on making money” means just that: it doesn’t care how they make money. Once you say, “business should focus on making money – but only if they make it in a way that isn’t rent-seeking” you might as well throw in “but only if they make it in a way that isn’t destructive of the environment” or “but only if they make it in a way that isn’t disruptive of local economies” or whatever.

It makes much more sense to me to say that the purpose of a business is to provide a product or service. The purpose of a bar isn’t to make money – it’s to serve drinks. The purpose of my owning a bar may or may not be to make money – that’s another question. The purpose of leaving bars in general subject to the discipline of market forces to determine which bars remain in business and which fail is that we as a society believe that this is the best way to get an overall good level of bar service at a reasonable price. But that’s a question of system design, and not a question of the ethics of any individual participant in the system.

Aaron: you’re right, and I probably shouldn’t have phrased my argument as an argument with Friedman. But I want to take on something you wrote. You say:

We have a government in place to decide where market and civil society have failed to provide social goods, and how much cost to impose on society in order to achieve those goods through a process that we generally think is good for keeping factions and whims in check and decentralizing power where we think it needs to be decentralized. Your workers councils and whatnot suddenly reempower factions.

That’s one way of looking at it. Another way would be to say that we have rules for how businesses may be organized, rules for how unions may be organized, and a presumptively adversarial system for arbitrating between labor and management. Both the first and second set of rules can be changed, and have been at various points in time, to shift the balance of power more in the direction of management or labor. But you could also alter that adversarial presumption in favor of a system in which labor has both more power over and more responsibility for the businesses which provide them employment. I’m not saying that such a scheme would work for America – and I’m not saying it wouldn’t. I’m just noting that the United States has a more adversarial system than Germany. (And just to be clear: both an adversarial system and a consensual system can be tilted more in favor or management or more in favor of labor. France has a pretty adversarial system, but labor is much more empowered in France than in the United States; Japan has a much more consensual system than the United States, but management is much more empowered in Japan than in Germany.)

Regarding free money: you are correct that personal honor may prevent someone from taking free money. And I think everybody has turned down lucrative offers because they conflicted with some other personal value – I certainly have. I don’t anybody is arguing that anybody should put accumulation of wealth at the top of their hierarchy of values – I certainly am not. But I think we should be careful about assuming that a refusal to take genuinely free money is always a good thing. For example, there’s some real moral benefit to people in refusing to welch on their debts – people benefit from that strength of character regardless of whether they benefit economically. But debt collectors are able to take advantage of that strength of character to make money in what amounts to a predatory fashion. And the empowerment of that kind of bad behavior has to be included in the moral calculus along with the empowerment of good behavior on the part of debtors – they are two sides of the same coin.

Finally, a word about corporate entities. Formally, corporations exist for the purpose of making money for shareholders. But like any organism, the only real animating purpose of a corporation – for-profit or not – is self-perpetuation. Businesses close all the time without going bankrupt – the owners see the writing on the wall, withdraw their remaining capital, and shut their doors. When was the last time a public company did something similar? The fact that this basically doesn’t happen – public companies either get sold or go bankrupt, but they don’t just return capital to shareholders and shut their doors – says something, I think, about whether they really are being run for the benefit of the owners. I tend to think that no perpetual corporate entity can actually fulfill the mandate of being run primarily for the benefit of the owners, or to fulfill any other mandate; the first guiding principle of any such organization will always be: self-perpetuation.

Actually, I could be accused of doing something very similar. There is an important difference, though. When I do it I am pleased with myself for being clever. When someone else does it I feel cheated.